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Boeing won’t freeze wages — McNerney

Boeing CEO Jim McNerney’s Tuesday memo to Boeing employees that this story is based on can be found further below.

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Boeing Chairman and Chief Executive Jim McNerney has told company employees in an e-mail that a suggestion by some of them to freeze wages across the company instead of cutting about 10,000 positions this year is not the best way to weather the ongoing industry downturn.

“More than a few of you have written to me asking whether we could avoid layoffs altogether by not paying incentive awards this year or by freezing wages across the board,” McNerney wrote Tuesday in a companywide memo.

“While these actions would preserve some cash during the year and lessen the immediate impact on people, our judgment (and one shared by most major companies) is that they would put us at a competitive disadvantage when it comes to attracting and retaining the high-performing people we need to consistently perform for our customers.”

The aerospace giant, with more than 160,000 employees, announced last month that it will reduce its work force by about 10,000 positions in 2009 in response to the global economic downturn. That includes about 4,500 positions in its commercial airplanes business in the Puget Sound area.

In his memo, McNerney said again that the reductions “include some layoffs” but also will be accomplished through attrition, retirements, by not filling some open positions and by cutting contract labor.

“The mix of these elements varies by business area and geography, and the reductions, while weighted heavily in the first half, will be spread over the course of the year,” McNerney wrote. “We’re keeping close watch on the dynamics of our business environment and the factors that affect employment. We will be sure to keep you informed should anything in our outlook change.”

There was little new in his memo that was not announced last month when Boeing’s chief executive reported on the company’s fourth-quarter earnings.

The incentive awards that McNerney referred to in his memo is Boeing’s Employee Incentive Plan, which is a cash bonus paid to eligible workers each year and is linked to how well Boeing did in meeting certain financial targets the previous year. The payout can be for up to 20 days’ extra pay. Nonunion workers at Boeing, but not executives, are eligible for the incentive plan bonus, as are most engineers and technical workers represented by the engineers’ union known as SPEEA. But members of Boeing’s Machinists union are not part of the employee incentive plan.

Boeing announced last month that it met enough of its 2008 financial targets for the plan to pay out six extra days. In Washington state, about 48,120 eligible employees will receive an estimated payout of $96.5 million this month. Companywide, 110,000 eligible recipients will receive an estimated $220 million.

The global economic meltdown and recession that prompted the Boeing job cuts has thrown the airline industry into a downturn that is already worse than what happened after the Sept. 11, 2001, terrorist attacks.

A growing number of airlines are expected to defer orders previously placed with Boeing and Airbus.

During a visit to Seattle earlier this month, Steven Udvar-Hazy, founder and chairman of International Lease Finance Corp., the world’s biggest airplane leasing company and the biggest single customer for Boeing and Airbus planes, told reporters he believes Boeing could cut its production by as much as 35 percent over the next 18 months as airlines defer orders.

Any production cuts of that scope would likely mean production-related layoffs, which Boeing has so far said it hopes to avoid as it maintains production at currently high rates to deliver a record backlog of jets.

Boeing plans to deliver 480 to 485 planes this year.

In 2008, customers canceled six orders and deferred the delivery of 110 jets.

Because of a global credit crunch airlines and leasing companies will find it more difficult to get financing to pay for planes already on order. Most of the money for a new jet is paid at the time of delivery.

Hazy said Boeing and Airbus could actually end 2009 with more net cancellations and deferrals than orders.

So far in 2009, Boeing has won only 18 orders, but had 31 orders canceled for its 787, giving it a net of minus 13 orders.

On Monday, one of the industry’s bellwether international airlines, Singapore, said it will cut 17 aircraft and reduce capacity by 11 percent and may furlough staff because of the global economic downturn.

“The drop in air transportation has been sharp and swift,” Singapore Airlines Chief Executive Chew Choon Seng said in a statement. “Given the falls of over 20 percent that we have seen recently in air-cargo shipments, and the tradition of demand for air travel following closely behind trends on the cargo side of the business, we have to face the reality that 2009 is going to be a very difficult year.”

And Air France-KLM said Monday it will cut capacity and defer delivery of some Boeing and Airbus planes on order for up to two or three years.

But Air France will take Boeing’s first 777 freighter as planned. That delivery is planned for Thursday.

In his memo, McNerney acknowledged that the economic climate could get worse.

“The next 12 to 18 months promise us a steady flow of tough business challenges and increased opportunities to support our customers,” he wrote. “Many experts believe the economic news could get worse before it gets better, and we’ve tried to anticipate some of that in our plans. While it’s hard to know the final impact, we must be prepared should conditions worsen beyond the already difficult environment we have assumed.”

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McNerney memo:

Jim McNerney
Chairman, President and Chief Executive Officer

History tells us that the quicker a company acts to counter adverse economic conditions, the better able it will be to work its way through a downturn and emerge stronger when the economy recovers. That’s why we began last fall to stress even more the importance of improving productivity and finding new ways to operate more efficiently.

As we suspected then, the economy has continued to struggle mightily, putting even greater pressure on our commercial customers and potentially further straining defense budgets. We have compounded the situation ourselves with the setbacks we had last year with the machinists’ strike and our performance issues on key development programs.

As I told shareholders and analysts on our quarterly earnings call last month, our strategy for weathering this storm is to improve execution on our underperforming programs, maintain strong performance on the vast majority of our programs that are performing well, and preserve our financial strength to enable continued investment in our business and our employees, including our pension and benefits plans.

With that in mind, we have been taking decisive action:

* To improve programs that have not been performing to plan: We have bolstered program-management processes, increased functional discipline and oversight, applied additional resources and technical expertise, and made leadership changes where we believed it was necessary to improve the team’s performance. As part of that, we have also rebalanced our program-review schedule to place greater time and attention on underperforming programs. Reliable, disciplined execution across all programs is not merely an aspiration for us; it’s an imperative. Our customers have choices, and disappointing them has consequences for our business and relationships.

* To maintain strong performance where it exists: We are asking all employees to redouble their efforts to focus on sustained, strong execution and to leverage our growth and productivity initiatives to drive even higher levels of efficiency and competitiveness. Sharing and replicating best practices, ensuring functional discipline and excellence, and raising issues and concerns early are all key to keeping the hundreds of healthy, successful programs inside our company healthy and successful.

* To preserve our financial strength: We have put a spotlight on cash and asset management. In prior years, we generated substantially more cash than we needed for daily operations. Despite strong performance across most of our programs, last year’s strike, delays on development programs, and lower returns on our investments (due to the financial crisis) changed that. In response, we have reduced discretionary and capital-spending budgets. We have centralized and consolidated organizational structures to both slim and strengthen them.
We are eliminating work that doesn’t add value to our customers, and we are reducing staffing levels to support a trimmed-down infrastructure.

None of these actions are easy, especially those that affect employment of our people. But they are all necessary elements of our strategy to support our customers during uncertain times and to ensure our competitiveness and growth over the long haul. They require stepped-up responsibility and accountability by leadership as well as the involvement of every employee. As we work through them, it’s also vital that we stay fully engaged with our customers. We cannot let our attention to internal efforts distract us from serving them, nor can we leave any impression that our focus on them has waned.

Regarding 2009 employment plans: When we looked at it last fall, we said we expected reductions in excess of our normal attrition rate of 4 to 5 percent by the end of this year. Our current estimate of 6 percent, or about 10,000 jobs, is consistent with that initial expectation and the business assumptions behind it. It’s important to note that while the planned reductions include some layoffs, they also rely on attrition, retirements, not filling some open positions, and cutbacks in contract labor. The mix of these elements varies by business area and geography, and the reductions, while weighted heavily in the first half, will be spread over the course of the year. We’re keeping close watch on the dynamics of our business environment and the factors that affect employment. We will be sure to keep you informed should anything in our outlook change.

More than a few of you have written to me asking whether we could avoid layoffs altogether by not paying incentive awards this year or by freezing wages across the board. While these actions would preserve some cash during the year and lessen the immediate impact on people, our judgment (and one shared by most major companies) is that they would put us at a competitive disadvantage when it comes to attracting and retaining the high-performing people we need to consistently perform for our customers.

Having said that, I want to assure you that we have taken (and will continue to take) steps to mitigate the impact to our team. For example, we are consciously restraining salary growth this year in order to lessen the number of job cuts we need to make while retaining flexibility to fund growth projects and preserve key skills across the enterprise. We also continue to provide the best transition assistance we can to laid-off employees.

The next 12 to 18 months promise us a steady flow of tough business challenges and increased opportunities to support our customers. Many experts believe the economic news could get worse before it gets better, and we’ve tried to anticipate some of that in our plans. While it’s hard to know the final impact, we must be prepared should conditions worsen beyond the already difficult environment we have assumed. But, as I’ve mentioned above, we have a plan to deal with the situation and it is a good one. We know what we need to do to navigate this turbulence. If we execute well — with integrity and always consistently with our values
— we will prevail through even the most difficult of times — and emerge stronger when the economic tide turns.

Note: This is a seattlepi.com reader blog. It is not written or edited by the P-I. The authors are solely responsible for content. E-mail us at newmedia@seattlepi.com if you consider a post inappropriate.